Executive Summary: Key Legal and Evidentiary Issues

• Inconsistent provincial tax filings by the taxpayer (loan corporation in Quebec, general corporation in Ontario) triggered conflicting allocation formulas and alleged double taxation for the 2011 tax year.
• The core legal issue was whether the intergovernmental Memorandum of Understanding (MOU) on avoiding double taxation imposed a duty on Ontario, through the CRA, to intervene with Revenu Québec.
• The court applied administrative law principles under Vavilov to assess whether the CRA’s interpretation of the MOU and its decision to take no further steps with Quebec were reasonable.
• Evidence showed that any double taxation stemmed from the taxpayer’s own inconsistent declarations, not from Ontario or Quebec proposing different allocation methods under the MOU framework.
• Allegations that CRA and Revenu Québec made a “back room deal” and failed in procedural fairness were rejected because communications between the authorities were not legally required to be disclosed and were not central to the decision.
• The court held that the MOU did not apply on these facts, so Ontario had no legal obligation to negotiate or compel Quebec to change its position, leading to dismissal of the application and a modest costs award to the Minister.

Background and parties

Royal Credit Services Inc. is a Canadian resident corporation operating in the automotive finance sector in Ontario and Quebec. It earns income from conditional sales contracts, dealer loans and leases and has historically operated under different names, including General Motors Acceptance Corporation of Canada Limited, Ally Credit Canada Limited and, since 2013, Royal Credit Services Inc. The Minister of Finance for Ontario, acting through the Canada Revenue Agency (CRA) as agent, administers the provincial income tax regime for Ontario.

Provincial income allocation and regulatory framework

Because Royal Credit Services carries on business in both Ontario and Quebec, its provincial income tax liability is determined by allocating its income between the provinces under specific statutory and regulatory rules. Loan corporations are governed by Regulation 405 of the Income Tax Act, which uses a particular gross-revenue allocation formula, while general corporations are governed by Regulation 402, which uses a different allocation formula. Although the technical details of these formulas were not central to the court’s analysis, it was important that each province must apply the same type of regulation to avoid double taxation. In this case, the clash arose from the use of different regulatory regimes for the same taxpayer and year.

The 2011 tax year and emergence of double taxation

From 1994 through 2011, Royal Credit Services filed as a loan corporation in Quebec but as a general corporation in Ontario. The record before the Divisional Court did not explain why it adopted this inconsistent approach, and counsel for the taxpayer could not provide a justification. For the 2011 taxation year, Revenu Québec accepted the taxpayer’s designation as a loan corporation and applied Regulation 405, which resulted in 62.2% of income being allocated to Ontario and 37.8% to Quebec. By contrast, in Ontario, the Minister accepted the taxpayer’s designation as a general corporation and applied Regulation 402, which resulted in 71.4% of income being allocated to Ontario and 28.5% to Quebec. The combined effect was taxation on 71.4% of income in Ontario and 37.8% in Quebec, a total of 109.2% of income. This 9.2% excess translated into alleged double taxation of about $15 million for the 2011 year. The taxpayer accepted Ontario’s interpretation that it was properly a general corporation for 2011 and did not dispute that interpretation in this proceeding, focusing instead on what it viewed as Quebec’s misapplication of the rules.

Developments in the 2012 tax year

The 2012 tax year provided a contrasting backdrop. That year, Royal Credit Services declared itself to be a loan corporation in both Ontario and Quebec. The CRA, acting for Ontario, disagreed and reassessed the taxpayer as a general corporation under Regulation 402. The taxpayer did not challenge that conclusion. This created inconsistency in 2012 not because of different filings, but because the two tax authorities initially reached different conclusions. After negotiations between the Minister and Revenu Québec, Quebec agreed to treat the taxpayer as a general corporation for 2012. Once both provinces applied the same regime, the allocation formula aligned and the double taxation concern for 2012 was resolved. This example demonstrated how the intergovernmental process can operate where a province proposes to change the taxpayer’s allocation method.

The taxpayer’s steps to address 2011 in Ontario and Quebec

To address the 2011 problem, Royal Credit Services took several steps in each province. In Ontario, it filed a Taxpayer’s Request in 2013 to amend its 2011 return to treat itself as a loan corporation under Regulation 405, seeking to mirror its status in Quebec. In a second-level review on July 26, 2021, the CRA Compliance Branch denied this request, concluding that the principal business of the taxpayer was not making loans. Its largest source of revenue was conditional sales contracts, and prior case law had confirmed that such contracts are not loans. On that basis, the CRA held that the taxpayer was properly a general corporation under Regulation 402 and declined to reassess the 2011 Ontario return; this conclusion was not challenged on this judicial review. In Quebec, Royal Credit Services requested that its 2011 status be changed from loan corporation to general corporation, analogous to what Quebec ultimately did for 2012. On December 8, 2023, Revenu Québec refused, characterizing the request as retroactive tax planning designed to undo the inconsistency and reduce tax rather than a case of genuine double taxation. The taxpayer then brought proceedings in the Quebec Superior Court to challenge that refusal.

Parallel Quebec proceeding and limits on relief

In December 2025, the Quebec Superior Court applied Vavilov and found that Revenu Québec’s reasons for refusing the 2011 amendment were insufficient, granting the application and sending the matter back for reconsideration. The court declined, however, to issue the broader remedial directions requested by the taxpayer, including instructions that Quebec’s Minister of Finance communicate with the federal authorities to resolve double taxation. The Quebec Superior Court expressly refused to order such intergovernmental steps, underscoring the limits of what a court can require of a revenue authority in this kind of administrative review. At the time of the Ontario Divisional Court’s decision, the Quebec reconsideration process remained ongoing. If Revenu Québec ultimately allows the 2011 amendment and designates the taxpayer as a general corporation, the double taxation would be resolved without any further action from Ontario.

The Memorandum of Understanding on avoiding double taxation

A key legal foundation for the taxpayer’s Ontario application was an intergovernmental Memorandum of Understanding for the Avoidance of Double Taxation of Corporations. This MOU is an agreement among the CRA, the Government of Ontario, the Minister of Revenue for Quebec, and the Government of Alberta. Its stated purpose is to establish a process to identify potential disputes between its parties with respect to the application of a taxpayer’s business operations allocation formula and to enable the resolution of these disputes to avoid double taxation. Operationally, the MOU contemplates that where a party proposes to change the allocation formula used by a taxpayer, that party must notify the other affected parties, share necessary information and attempt to resolve disputes arising from such proposed changes. In short, the MOU is designed for situations in which a tax authority proposes to reassess or change the allocation method the taxpayer itself used, triggering potential double taxation unless the other authorities adjust their positions correspondingly. It is within this architecture that the court assessed whether Ontario had any legal obligation to do more for Royal Credit Services in relation to 2011.

The CRA decision under review

The specific decision under review was a letter dated May 29, 2023, from the CRA Appeals Division, acting as agent for the Ontario Minister. In that decision, the CRA stated that it would take no further actions under the MOU with Revenu Québec regarding the alleged 2011 double taxation. The letter explained that Ontario assessed the taxpayer under Regulation 402, while Quebec assessed under Regulation 405, but in each jurisdiction the authority agreed with the taxpayer’s original filing position. The CRA reasoned that the MOU applied where one authority proposes to change the regulation or allocation formula used by the taxpayer, not where each authority simply accepts the taxpayer’s own self-selected treatment in its return. The letter also asserted that no proposal under the MOU had been made by the CRA or Revenu Québec to change the allocation method, and therefore that the MOU was not engaged and the CRA would not contact Revenu Québec to propose a reassessment under Regulation 402 for 2011. Royal Credit Services argued that this reasoning was factually inaccurate and legally unreasonable, and that it masked a “back room deal” between the authorities.

Prior communication and alleged omissions in the reasons

Factually, there had been earlier communications between the CRA and Revenu Québec. On August 15, 2016, the CRA proposed to Revenu Québec that Quebec accept Ontario’s filing position for 2011 and use Regulation 402, including certain proposed changes to gross revenue and salaries and wages allocations. In July 2017, Revenu Québec replied that it did not agree with those proposed changes and said it would hold the corporation-status issue in abeyance pending advice from its legal department. Subsequently, the tax authorities reached an administrative understanding documented in a CRA memo to file in September 2022. Under that understanding, CRA would deny the taxpayer’s request to be treated under Regulation 405 in Ontario, withdraw its 2016 proposal to Quebec for 2011, and maintain Ontario’s treatment under Regulation 402, while Revenu Québec would keep 2011 under Regulation 405 but accept Ontario’s position and change to Regulation 402 for the 2012 year. The taxpayer criticized the CRA’s 2023 decision for failing to refer to this history, arguing that the omission rendered the decision unreasonable and procedurally unfair. The court rejected that argument. It emphasized that, by the time of the May 2023 decision, the earlier proposal had been withdrawn and no live proposal under the MOU was outstanding regarding 2011. In that context, the statement that there was “no proposal under the MOU” was not misleading, and the CRA was not required to detail its entire communication history with Quebec in its reasons.

Standard of review and procedural fairness

Both parties accepted that the CRA’s decision was reviewable for reasonableness under Vavilov. The court therefore asked whether the outcome, and the justification for that outcome, were transparent, intelligible and justified on the record. On procedural fairness, the court applied well-established principles that the content of the duty is flexible and context specific, shaped by the nature of the decision, the statutory scheme and the importance of the decision to the affected party. Requests for reassessments and objections in the tax context are typically decided on a written record, not through hearings. In this framework, the court held that the CRA was not obliged to respond to every argument or recount every line of analysis, nor was it obliged to disclose internal discussions with Revenu Québec that were not central to its final interpretation of the MOU. The absence of detailed reference to those communications in the decision letter did not amount to unfairness. The court also rejected the notion that high-level discussions between CRA and Revenu Québec at the director level were improper; such dialogue is inherent in making the MOU workable and did not offend procedural fairness.

Interpretation and application of the MOU

The heart of the legal analysis lay in whether the MOU, properly interpreted, imposed on Ontario any obligation to continue or renew efforts to resolve the taxpayer’s 2011 double taxation. The court focused on the MOU’s purpose and operational provisions, which address cases where a party to the MOU proposes to change the allocation formula the taxpayer used, and then must notify other parties and engage in a dispute-resolution process to avoid double taxation. In this case, however, the double taxation arose not because Ontario or Quebec proposed to change the taxpayer’s allocation method, but because the taxpayer itself chose inconsistent designations and formulas in each province for 2011, and each authority accepted those filings. In other words, no province was seeking to override or correct the taxpayer’s chosen allocation method for its own jurisdiction. On that footing, the court concluded that the CRA’s view of the MOU was reasonable: the instrument did not require Ontario to pressure Revenu Québec into altering Quebec’s assessment when both authorities agreed with the taxpayer’s respective filing positions in their own provinces. The court also rejected the taxpayer’s argument that, even if the MOU did not strictly apply, Ontario had some broader legal duty to act intergovernmentally. Outside the MOU, the Minister had no legal obligation to supervise or intervene in Quebec’s decisions. The CRA likewise had no power to instruct Revenu Québec how to assess a taxpayer.

Outcome and relief

Framed correctly, the application was not a challenge to Ontario’s substantive tax assessment or its conclusion that Royal Credit Services was a general corporation for 2011 under Regulation 402. The taxpayer accepted that classification and instead effectively sought to compel Ontario, via judicial review, to take additional steps under or beyond the MOU to persuade Quebec to reverse its position. The Divisional Court held that there was no such legal duty on Ontario, that the CRA’s interpretation of the MOU was reasonable, and that there was no breach of procedural fairness in how the decision was reached or explained. The application for judicial review was dismissed. As for monetary consequences, the court did not order any refund, damages or direct tax relief for Royal Credit Services in respect of the alleged $15 million double taxation; the only monetary order was an agreed-upon costs award of $5,000, all-inclusive, in favour of the successful party, the Minister of Finance for Ontario, and no other precise amount of compensation or damages could be determined from the decision.